Resurrecting a Zombie: The Revival of the Failed Keynesian Myth and the Logic of Joseph Stiglitz

Resurrecting a Zombie: The Revival of the Failed Keynesian Myth and the Logic of Joseph Stiglitz

Abstract: Nobel Prize winner Joseph Stiglitz recommends the economics of Keynes as a stimulus as do a lot of economists and particularly so from Paul Krugman, another Nobel laureate. To date, there is no believable benefit from several trillion dollars in deficit spending and the prospect of thrice that in the future. The economic arena is overflowing with theories and ‘examples’ that portend the ability to climb out of massive debt by spending and then growth, but an inspection of some of these, like Argentina, show that a debt restructuring was the only effective remedy. This resulted in massive defaults, collapses in the country’s credit and other major problems. We are buried in debt and are told that we can ‘spend our way’ out of this debt. This is nonsense. The Fed is trying to inflate our way out of debt and monetizing the debt as we go along. The US is in bad shape economically, but the UK and EU are even worse off. And, in all this flurry of spending suggestions there exists not a single detailed plan to pay back that debt. The EU will crash and disintegrate from this debt because, unlike Argentina, there is no way to ‘restructure’ our debts in the US-UK-EU group as no nation or organization has the necessary 20-40 trillion dollars it would require. If we cannot stop spending and bloating government we will go bankrupt. Period.

Here is the Stiglitz comment:

“Thanks to the IMF, multiple experiments have been conducted – for instance, in east Asia in 1997-98 and a little later in Argentina – and almost all come to the same conclusion: the Keynesian prescription works. Austerity converts downturns into recessions, recessions into depressions. The confidence fairy that the austerity advocates claim will appear never does, partly perhaps because the downturns mean that the deficit reductions are always smaller than was hoped.”[1]--To choose austerity is to bet it all on the confidence fairy The mystical belief is that a smaller deficit will lead to an investment boom. What Britain really needs now is another stimulus By Joseph Stiglitz guardian.co.uk, Tuesday 19 October 2010 22.00 BST [Emphasis is mine in all quotes.]

Here is some info on the Argentinean default:

The Argentinean default in 2002: Argentina defaulted on part of its external debt at the beginning of 2002. Foreign investment fled the country, and capital flow towards Argentina ceased almost completely. Argentina was "left out of the world." The currency exchange rate (formerly a fixed 1-to-1 parity between the Argentine peso and the U.S. dollar) was floated, and the peso devalued quickly, producing massive inflation.[2]—Wikipedia

We know from reading Niall Ferguson’s excellent book The Ascent of Money that Argentina ran out of money on Friday 28 April, 1989. The World Bank refused to put any more money and accused the country of not controlling its deficits and the printing of money forced inflation to rise to more than 100% per month. The national debt was denominated in dollars and soared in relation to the inflating austral. Changes in currency did not help. There were three bailouts by the International Monetary Fund, the IMF. Later the bondholders were clipped down to 35 cents per dollar of debt. By 1994 the debt reached 64% of the GDP.[3] This mess ended in default.

So, at this point, I wonder just how the Keynesian Formula can be applied in this case.

“Critics say government won't spend the money well. To be sure, there will be waste – though not on the scale that the private sector in the US and Europe wasted money in the years before 2008. But even if money is not spent perfectly, if experience of the past is a guide to the future, the returns on government investments in education, technology and infrastructure are far higher than the government's cost of capital. Besides, the choices facing the country are bleak. If the government doesn't spend this money there will be massive waste of resources as its capital and human resources are under-utilised.” --To choose austerity is to bet it all on the confidence fairy

Here, we can look at some of the Obama ill-spent monies that contributed to the debt at great future expense and made the intervention look silly if not psychotic.

We are still stuck with a 9.7% unemployment rate [as of March 27, 2010] and much of our current GDP comes from temporary stimuli like the recent ‘jobs’ program spent $92,000 per job[4] and, then, we spent $24,000 per car on the Clunker Follies and a mere $43,000 per house on the housing scam[5] And, none of these had a lasting effect. All of the money to propel this was either borrowed or printed up quickie fashion by our government.[6] This observation refutes the notion that the returns on government investments are effective or cost worthy.

I think it is clear that this spending is foolish. Obama wants to spend 9 trillion more in his term[s]. There are many enemies of capitalism and Obama and most leaders in the European Union are allies in this view.

This Stiglitz view can be contrasted with the Rogoff position:

In an open letter to Joseph Stiglitz of June 2002[7] we read about the use of deficits and debt to ease the growth of countries in dire debt: “The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.”[8]-- An Open Letter By Kenneth Rogoff, [Emphasis is mine in all quotes.]

The general gist of this is to learn that some variant of Keynes, with its stimulus and all that. can somehow lead any country out of the massive national debt they conjured due to spending in the socialist manner. But, missing is a realistic estimate of how we can avoid defaults and pay back that debt.

Stiglitz concludes:

“Britain is embarking on a highly risky experiment. More likely than not, it will add one more data point to the well- established result that austerity in the midst of a downturn lowers GDP and increases unemployment, and excessive austerity can have long-lasting effects.

If Britain were wealthier, or if the prospects of success were greater, it might be a risk worth taking. But it is a gamble with almost no potential upside. Austerity is a gamble which Britain can ill afford.”-- To choose austerity is to bet it all on the confidence fairy

I seem to get the feeling that Keynes didn’t solve any problems anywhere and that his emphasis on government spending was only a political sop to the socialists or worse. The Neo-Keynesians seem to be flush with all sorts of spending options and banking regulations including nationalization, but they seem to offer some vague ‘solution’ to be created by the ‘growth’ that will enable countries to handle their debts.

I have formed the impression that many of these ‘economists’ are only advocates or peanut gallery level chum chuckers for the rabid Left. No matter what the occasion, it seems many like Paul Krugman and now Stiglitz have no other solution but to spend or tax and spend and create mountains of debt. For this reason, they and their like-minded colleagues must be considered as a collective encumbrance to effective societies and those socialist countries that are now crashing in debt [this includes the US]. The so-called stimulus conjured by Obama and those ‘economists’ on the left have spent almost 4 trillion dollars [counting TARP] with nothing to show in terms of positive results. The notion that ‘millions of jobs have been saved’ is not convincing. Increasing the government is not any kind of a solution.

Krugman’s Eternal Solution to all government problems: spend more.

“Austerity is self-defeating: when everyone tries to pay down debt at the same time, the result is depression and deflation, and debt problems grow even worse. And conversely, it is possible — indeed, necessary — for the nation as a whole to spend its way out of debt: a temporary surge of deficit spending, on a sufficient scale, can cure problems brought on by past excesses.”[9]-- 1938 in 2010 By Paul Krugman

From a previous blog” [Sep 2010]

“It is of interest here to wonder how massive deficit spending on foolish stuff is effective in any way. The consequences of debt are always ignored. The Obama stimulus #1 has not worked and neither did cash for clunkers or the housing subsidies. The recent ‘jobs’ program spent $92,000 per job[10] and, then, we spent $24,000 per car on the Clunker Follies and a mere $43,000 per house on the housing scam.[11] And, none of these had a lasting effect. All of the money to propel this was either borrowed or printed up quickie fashion by our government. I wonder why Krugman cannot seem to defend or explain why these measures failed as he seems to cover up this offal with some nostrums about caution or insufficiency. In the lexicon of the left the word failure is always used as the limiting case. We failed to spend enough…or we failed to tax the rich some more or… When confronted with defending a stupid program like busing, War on Poverty, HUD, Welfare etc. there is silence. There is always a reason why such programs didn’t work out that well and they will recite the 1,2,3s above as the reason why the project was not exceptional.[12]

We cannot believe these people any more. They are now just a chorus of advocates singing the old Fabian songs of 1900.

rycK

Comments: ryckki@gmail.com

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[1] To choose austerity is to bet it all on the confidence fairy The mystical belief is that a smaller deficit will lead to an investment boom. What Britain really needs now is another stimulus By Joseph Stiglitz guardian.co.uk, Tuesday 19 October 2010 22.00 BST http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/19/no-confidence-fairy-for-austerity-britain [Emphasis is mine in all quotes.]

[2] http://en.wikipedia.org/wiki/Argentina_default

[3] The Ascent of Money: A Financial History of the World (Hardcover) by Niall Ferguson (Author) http://www.amazon.com/Ascent-Money-Financial-History-World/dp/1594201927

[4] 650,000 Strawdogs Bark at the Moon. The Obama ‘Recovery’ is a Numerical Monkey Circus

http://rycksrationalizations.blogtownhall.com/2009/10/31/650,000_strawdogs_bark_at_the_moon_the_obama_%E2%80%98recovery%E2%80%99_is_a_numerical_monkey_circus.thtml

[5] Belligerent Ignorance, Phony Economics and the Clunker Crusaders: Washington Wastes our Money Again.

http://rycksrationalizations.blogtownhall.com/2009/10/29/belligerent_ignorance,_phony_economics_and_the_clunker_crusaders_washington_wastes_our_money_again.thtml

[6] Maximizing Both Tax Revenues and Economic Growth: The Folly of Government and the Generation of Phony Numbers and Class Warfare

http://rycksrationalizations.blogtownhall.com/2010/03/27/maximizing_both_tax_revenues_and_economic_growth_the_folly_of_government_and_the_generation_of_phony_numbers_and_class_warfare.thtml

[7] To Joseph Stiglitz,

Author of Globalization and Its Discontents

(New York: W.W. Norton & Company, June 2002)

“The Stiglitzian prescription is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government's debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.”-- An Open Letter By Kenneth Rogoff, Economic Counsellor and Director of Research, International Monetary Fund http://www.imf.org/external/np/vc/2002/070202.HTM

[8] An Open Letter By Kenneth Rogoff, http://www.imf.org/external/np/vc/2002/070202.HTM [Emphasis is mine in all quotes.]

[9] 1938 in 2010 By Paul Krugman [Emphasis is mine in all quotes.] Published: September 5, 2010

http://www.nytimes.com/2010/09/06/opinion/06krugman.html?src=me&ref=general

Krugman Offers Us Canned Circular Revisionism: We Can Repeat the War Time Successes of FDR.

http://ryckki.blogspot.com/2010/09/krugman-offers-us-canned-circular.html

[10] 650,000 Strawdogs Bark at the Moon. The Obama ‘Recovery’ is a Numerical Monkey Circus

http://rycksrationalizations.blogtownhall.com/2009/10/31/650,000_strawdogs_bark_at_the_moon_the_obama_%E2%80%98recovery%E2%80%99_is_a_numerical_monkey_circus.thtml

[11] Belligerent Ignorance, Phony Economics and the Clunker Crusaders: Washington Wastes our Money Again.

http://rycksrationalizations.blogtownhall.com/2009/10/29/belligerent_ignorance,_phony_economics_and_the_clunker_crusaders_washington_wastes_our_money_again.thtml

[12] Krugman Offers Us Canned Circular Revisionism: We Can Repeat the War Time Successes of FDR.

http://ryckki.blogspot.com/2010/09/krugman-offers-us-canned-circular.html